Exam 5: Reporting and Analyzing Inventories

Match each definition to its term

The required method of reporting inventory at market when market is lower than cost

Consignor

One who receives and holds goods owned by another for purposes of selling the goods for the owner

Gross profit method

The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely

Consistency principle

Correct Answer:

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The required method of reporting inventory at market when market is lower than cost

Consignor

One who receives and holds goods owned by another for purposes of selling the goods for the owner

Gross profit method

The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely

Consistency principle

The accounting principle that says a company uses the same accounting methods period after period so that the financial statements of succeeding periods will be comparable

Days' sales in inventory

A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold, which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory

Consignee

An owner of goods who ships them to another party who will then sell the goods for the owner

Specific identification method

The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory

Inventory turnover

An estimate of days needed to convert the inventory available at the end of the period into receivables or cash

Lower of cost or market

The number of times a company's average inventory is sold during an accounting period

Retail inventory method

A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices

Conservatism principle

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Question 1

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A company has the following per unit original costs and replacement costs for its inventory: Part A: 10 units with a cost of $3 and replacement cost of $2.50 Part B: 40 units with a cost of $9 and replacement cost of $9.50 Part C: 75 units with a cost of $8 and replacement cost of $7.50 Under the lower of cost or market method,the total value of this company's ending inventory is:

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Question 2

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A company reported the following data: Year 1 Year 2 Year 3 Cost of goods sold \ 238,000 \ 375,000 \ 495,000 Ending inventory 120,000 150,000 180,000 Required: 1.Calculate the days' sales in inventory for each year. 2.Comment on the trend in inventory management.

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Question 3

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1.
$\begin{array}{|r|r|r|}\hline\text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline\\\frac{\$ 120,000}{\$ 238,000} \times 365= & \frac{\$ 150,000}{\$ 375,000} \times 365= & \frac{\$ 180,000}{\$ 495,000} \times 365= \\& & \\184 \text { days }&146\text { days } & 133 \text { days }\\\hline\end{array}$ 2.The company has a trend of decreasing the number of days it takes to sell its inventory.This is a positive reflection on inventory management provided there is sufficient inventory available to meet the sales demand.

Toys "R" Us had cost of goods sold of $8,321 million and its ending inventory was $2,027 million.Based on this,its days' sales in inventory is equal to 89 days.

(True/False)

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Question 4

All incidental costs of inventory acquisition and handling whether necessary or not,are assigned to inventory.

(True/False)

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Question 5

When purchase costs regularly rise,the ___________________ method of inventory valuation yields the lowest gross profit and net income,providing a tax advantage.

(Short Answer)

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Question 6

A company has inventory of 10 units at a cost of $10 each on June 1.On June 3,they purchased 20 units at $12 each.12 units are sold on June 5.Using the FIFO perpetual inventory method,what is the cost of the 12 units that were sold?

(Multiple Choice)

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Question 7

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

(True/False)

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Question 8

A company normally sells its product for $20 per unit.However,the selling price has fallen to $15 per unit.This company's current inventory consists of 200 units purchased at $16 per unit.Replacement cost has now fallen to $13 per unit.Calculate the value of this company's inventory at the lower of cost or market.

(Multiple Choice)

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Question 9

The _____________________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.

(Short Answer)

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Question 10

Acme-Jones Corporation uses a LIFO perpetual inventory system. August 2,25 units were purchased at $12 per unit. August 5,10 units were purchased at $13 per unit August 15,12 units were sold at $25 per unit. August 18,15 units were purchased at $14 per unit. What was the amount of the Cost of Goods Sold?

(Multiple Choice)

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Question 11

On June 30 a company needed to estimate its ending inventory to prepare its second quarter financial statements.The following information is available: Beginning inventory,April 1: $6,000 Net sales: $70,000 Net purchases: $36,000 The company's gross margin ratio is 12%.Using the gross profit method,the cost of goods sold would be:

(Multiple Choice)

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Question 12

GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

(True/False)

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Question 13

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

(True/False)

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Question 14

A company that has operated with a 30% average gross profit ratio for a number of years had $100,000 in sales during the first quarter of this year.If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter,its estimated ending inventory using the gross profit method is:

(Multiple Choice)

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Question 15

Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and as a result,are less serious.

(True/False)

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Question 16

Generally accepted accounting principles require that the inventory of a company be reported at:

(Multiple Choice)

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Question 17

A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

(True/False)

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Question 18

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.

(True/False)

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Question 19

The ______________________ method of inventory valuation better matches current costs with revenues in computing gross profit.

(Short Answer)

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Question 20

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A company reported the following data: Year 1 Year 2 Year 3 Cost of goods sold \ 238,000 \ 375,000 \ 495,000 Ending inventory 120,000 150,000 180,000 Required: 1.Calculate the days' sales in inventory for each year. 2.Comment on the trend in inventory management.

Toys "R" Us had cost of goods sold of $8,321 million and its ending inventory was $2,027 million.Based on this,its days' sales in inventory is equal to 89 days.

All incidental costs of inventory acquisition and handling whether necessary or not,are assigned to inventory.

When purchase costs regularly rise,the ___________________ method of inventory valuation yields the lowest gross profit and net income,providing a tax advantage.

A company has inventory of 10 units at a cost of $10 each on June 1.On June 3,they purchased 20 units at $12 each.12 units are sold on June 5.Using the FIFO perpetual inventory method,what is the cost of the 12 units that were sold?

Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost of making the sale.

The _____________________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.

GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs to inventory and IFRS does not.

An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

Managers are able to make important decisions correctly using erroneous inventory balances because inventory errors are self-correcting and as a result,are less serious.

Generally accepted accounting principles require that the inventory of a company be reported at:

A company's ability to pay its short-term obligations depends on many factors including how quickly it is able to sell its merchandise inventory.

The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each individual product.

The ______________________ method of inventory valuation better matches current costs with revenues in computing gross profit.

Introducing Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Reporting and Analyzing Merchandising Operations

Reporting and Analyzing Cash and Internal Controls

Reporting and Analyzing Receivables

Reporting and Analyzing Long-Term Assets

Reporting and Analyzing Current Liabilities

Reporting and Analyzing Long-Term Liabilities

Reporting and Analyzing Equity

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Investments and International Operations

Reporting and Analyzing Partnerships

Reporting and Preparing Special Journals

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